The federal government’s brain power is shrinking

July 22, 2011, 3:21 PM UTC

By Shelley DuBois, writer-reporter

FORTUNE — The federal government — our nation’s largest employer — is about to suffer a serious brain drain. And the Department of Defense, the

biggest employer within the federal government, is not sitting pretty.

Besides the 1.4 million active duty men and women employed by the Department of Defense, the agency also has a civilian workforce of over 700,000. One-third of those 700,000 employees will be eligible for retirement in 2015, as will 90% of civilian senior executives. Among these civilian employees are engineers, language specialists, and intelligence personnel.

The DOD is hardly the only government agency facing this issue. In fact, the Government Accountability Office (GAO) flagged human capital management, or the ability to hire and keep good people, as a government-wide “high-risk” issue in 2001.

Today, this issue is particularly pressing across many agencies. About 35% of the employees at the Department of the Treasury will be eligible to retire by 2012. So will 40% of workers at the Department of Energy and 46% of people working for the Department of Transportation.

The good news is that many of these departments will have to slim down anyway, and this retirement cliff could offer an opportunity for agencies to become more efficient. The bad news is that it’s often difficult for these agencies to do the kind of self-examination it takes to develop an ideal shrinking strategy. The Department of Defense is no exception.

On July 14, the GAO testified before Congress on the DOD’s looming retirement issues, and pointed out an alarming mismatch between the positions that the DOD says it needs and the ones it’s will be able to fund. The DOD requested to hire more than 400 new executives by 2015. Meanwhile, the administration’s 2012 budget for the DOD calls for eliminating 200 senior civil servant positions.

“I don’t know how they came up with the numbers,” says Brenda Ferrell, director of defense capabilities and management for the GAO, and that’s the problem: the DOD didn’t have much data to support the request because it’s just starting to learn how to perform the proper analyses. Before 2001, it never had to do this kind of analysis. Unfortunately for the department, it’s going to have to learn fast.

“The sense of urgency is here now because they may have to make some very tough decisions about where they’re going to put their resources,” Ferrel says.

Luckily, this could also be an opportunity for the DOD. In fact, federal agencies in general could become significantly more efficient operations if they keeping better tabs on their talent pool, says Allen Zemen, president of the Center for Human Capital Innovation (CHCI), a consulting firm.

There are a couple of simple first steps. The Partnership for Public Service suggests distributing employee questionnaires to identify potential talent gaps. Agencies also need to conduct thorough exit interviews when members of senior leadership leave their jobs, and then make changes based on suggestions.

That process will require a mental shift, says Richard Rawlinson, a vice president at global management consulting firm Booz & Company. Typically, government agencies wait for executives to retire, then adjust accordingly, he says, “rather than manage the mix of skills that they have.” Planning for future hiring needs may be a new skill, but it’s a necessary one.

Government agencies could also sidestep problems on the front-end by improving civilian hiring efforts, says Zemen. “Many civilians would want to work for government agencies if they knew what their mission was and that they could be part of it.” In other words, the new IT recruit should feel part of the “Army Strong” campaign too.

One way agencies can get that message out is to develop a relationship with the prospective employees early on, says Ashley Harshank, a vice president at Booz & Co. This means sending researchers to teach at universities, offering scholarships, and developing robust internship programs.

For now, though, the government needs to do some soul searching in a way that it hasn’t had to in recent years. The administration is demanding that agencies such as the Defense Department do more with less. To make that happen, they will need to quickly learn which soon-to-be-open positions need to be replaced, and which ones can be let out to pasture.